The Manager and Management

Accounting
Accounting Discipline Overview
• Managerial Accounting – measures, analyzes and reports financial and
nonfinancial information to help managers make decisions to fulfill
organizational goals. Managerial accounting need not be GAAP
compliant.

• Financial Accounting – focus on reporting to external users including

investors, creditors, and governmental agencies. Financial statements
must be based on GAAP.
Major Differences Between
Financial and Managerial Accounting
Managerial Accounting Financial Accounting

Communicate financial position to

Purpose Decision making
outsiders

Primary Users Internal managers External users

Focus/Emphasis Future-oriented Past-oriented

GAAP compliant;
Rules Do not have to follow GAAP; cost vs. benefit
CPA audited
Ultra current to very long
Time Span Historical monthly, quarterly reports
time horizons
Indirect effects on
Behavioral Issues Designed to influence employee behavior
employee behavior
Strategy and Management Accounting
• Strategy – specifies how an organization matches its own capabilities
with the opportunities in the marketplace to accomplish its
objectives

• Strategic Cost Management – focuses specifically on the cost

dimension within a firm’s overall strategy
Strategy and Management Accounting
• Management accounting helps answer important questions such as:
Who are our most important customers, and how do we deliver value to them?
What substitute products exist in the marketplace, and how do they differ from our own?
What is our critical capability?
Will we have enough cash to support our strategy or will we need to seek additional sources?
Management Accounting and Value
• Creating value is an important part of planning and implementing
strategy

• Value is the usefulness a customer gains from a company’s product

or service
Management Accounting and Value
• Value Chain is the sequence of business functions in which customer usefulness is added to
products or services

• The Value-Chain consists of:

Research & Development
Design
Production
Marketing
Distribution
Customer Service
The Value Chain Illustrated
A Value Chain Implementation
Key Success Factors
• The dimensions of performance that customers expect, and that are key to the success of a
company include:
Cost and efficiency
Quality
Time
Planning and Control Systems
• Planning selects goals, predicts results, decides how to attain goals, and communicates this to
the organization
Budget – the most important planning tool

• Control takes actions that implement the planning decision, decides how to evaluate
performance, and provides feedback to the organization
Management Accounting Guidelines
• Cost – Benefit approach is commonly used: benefits generally must
exceed costs as a basic decision rule
• Behavioral & Technical Considerations – people are involved in
decisions, not just dollars and cents
• Different definitions of cost may be used for different applications.
Management accountant’s role
1. Scorekeeping
2. Problem solving
3. Attention directing
Short Exercise for Discussion
• Exercise 1, 2 and 3
Basic Cost Terminology
• Cost – sacrificed resource to achieve a specific objective

• Actual cost – a cost that has occurred

• Budgeted cost – a predicted cost

• Cost object – anything of interest for which a cost is desired

Cost Object Examples at BMW
Cost Object Illustration

Product BMW X 5 sports activity vehicle

Service Dealer-support telephone hotline

Project R&D project on DVD system enhancement

Herb Chambers Motors, a dealer that purchases a broad

Customer range of BMW vehicles

Activity Setting up production machines

Department Environmental, Health & Safety

Basic Cost Terminology
• Cost assignment – a general term that includes gathering accumulated costs to a cost object
This includes:
Tracing accumulated costs with a direct relationship to the cost object and
Allocating accumulated costs with an indirect relationship to a cost object
Direct and Indirect Costs
• Direct costs – can be conveniently and economically traced (tracked)
to a cost object
• Indirect costs – cannot be conveniently or economically traced
(tracked) to a cost object. Instead of being traced, these costs are
allocated to a cost object in a rational and systematic manner
BMW: Assigning Costs to a Cost Object
Cost examples
• Direct Costs
Parts
Assembly line wages

• Indirect Costs
Electricity
Rent
Property taxes
Cost Behavior
• Variable costs – changes in total in proportion to changes in the related level of activity
or volume
• Fixed costs – remain unchanged in total regardless of changes in the related level of
activity or volume
• Costs are fixed or variable only with respect to a specific activity or a given time period
• Variable costs – are constant on a per-unit basis. If a product takes 5 pounds of
materials each, it stays the same per unit regardless of one, ten or a thousand units are
produced
• Fixed costs – change inversely with the level of production. As more units are
produced, the same fixed cost is spread over more and more units, reducing the cost
per unit
Cost Behavior Summarized

Total Dollars Cost Per Unit

Variable Costs Change in Unchanged in
proportion with relation to output
output
More output = More cost

Fixed Costs Unchanged in Change inversely

relation to output with output
More output = lower cost
per unit
Cost Behavior Visualized
Other Cost Concepts
• Cost Driver – a variable that causally affects costs over a given time span

• Relevant Range – the band of normal activity level (or volume) in which there is a specific
relationship between the level of activity (or volume) and a given cost
For example, fixed costs are considered fixed only within the relevant range.
Relevant Range Visualized
A Cost Caveat
• Unit costs should be used cautiously. Since unit costs change with a different level of output or
volume, it may be more prudent to base decisions on a total dollar basis.
Unit costs that include fixed costs should always reference a given level of output or activity
Unit Costs are also called Average Costs
Multiple Classification of Costs
• Costs may be classified as:
Direct / Indirect, and
Variable / Fixed

• These multiple classifications give rise to important cost combinations:

Direct & Variable
Direct & Fixed
Indirect & Variable
Indirect & Fixed
Multiple Classification of Costs, Visualized
Different Types of Firms
• Manufacturing-sector companies – create and sell their own
products

• Merchandising-sector companies – product resellers

• Service-sector companies – provide services (intangible products)

Types of Manufacturing Inventories
• Direct Materials – resources in-stock and available for use

• Work-in-Process (or progress) – products started but not yet

completed. Often abbreviated as WIP

• Finished Goods – products completed and ready for sale

Accounting Distinction Between Costs
Inventoriable costs

Period costs
Types of Product Costs
• Also known as Inventoriable Costs
Direct Materials
Direct Labor
Indirect Manufacturing – factory costs that are not traceable to the product. Other common
names for this type of cost include Manufacturing Overhead costs or Factory Overhead costs.
Cost Flows Visualized
Cost of Goods Manufactured
Multiple-Step Income Statement
Other Cost Considerations
• Prime cost is a term referring to all direct manufacturing costs (labor and
materials)

• Conversion cost is a term referring to direct labor and factory overhead

costs, collectively

• Overtime labor costs are considered part of overhead due to the inability
to precisely know the true cause of these costs
Different Definitions of Costs
for Different Applications
• Pricing and product-mix decisions – may use a “super” cost approach
(comprehensive)

• Contracting with government agencies – very specific definitions of cost

for “cost plus profit” contracts

• Preparing external-use financial statements – GAAP-driven product costs

only
Different Definitions of Costs
for Different Applications
Long Exercise
Exercise 2- Cost systems Industry note
Exercise 3- Question on manufacturing account
Cost systems Industry note
Cost systems Industry note
Cost systems Industry note
Cost systems Industry note
Cost systems Industry note
Question on manufacturing account